Reported Earnings (EPS)

Earnings per Share

Calculation of Accounting or Reported Earnings. Abstract

Reported Earnings (RE), and its derivative earnings per share (EPS), is a traditional method used for determining corporate
value and can be calculated by subtracting the dividends on preferred
stock from net income, and dividing the result by the (weighted average of
the) combination of all outstanding common shares and all common stock
equivalents (figure)

Fully Diluted EPS means that all
common stock equivalents (convertible bonds, preferred stock, warrants, and
rights) have been included along with the common stock.

Anyway, EPS
(=accounting earnings, = reported earnings) is and has always been a
poor indicator of
corporate value!

Five major
reasons why EPS fails to reliably
measure the economic value of firms are:1. Alternative accounting methods may be employed (both required changes
by FASB or IAS and voluntary changes can change reported E., but do
not affect economic value)2. Risk is excluded (both business risk and financial risk are not
accounted for in annual reports)3. Investment requirements are excluded (changes in for example the
working capital are not considered in reported E.)4. Dividend policy is not considered (for example dividend decreases will
show increased reported E. but are in fact value neutral)5. The time value of money is ignored (no present value calculation in
reported E.)

In the last 10
years, an additional 6th major reason has appeared:6. The increased role intangibles play in our economic system, which has
moved from an industrial economy towards a services and knowledge oriented
economy.

Despite Enronitis,
EPS is still being widely used in many annual reports.